Hedge Fund Gains Powered by Nordic Electricity: Energy Markets

Electricity powerlines carry power over the motorway at Danderyd in Stockholm. Photographer: Eric Roxfelt, Galbe.Com/Bloomberg

Dec. 15 (Bloomberg) -- Arctic weather, water shortages and
halted reactors drove Nordic power prices to the biggest monthly
gain in three years, boosting profits at hedge funds investing
in European energy markets.

Electricity across four Nordic countries for the next
quarter jumped on Dec. 13 to its highest level since 2006, after
advancing 27 percent last month. The surge gave Nordic Power
Trading F.M.B.A. a 29 percent return in November, while Norwatt
Energy AS’s fund rose 6.6 percent, topping a Bloomberg survey
this week of nine funds that together manage at least $268
million.

“When there’s high volatility, I earn money,” said Bjarne
Walbech, owner and fund manager at Nordic Power Trading. “You
can bet it is going to be a really volatile winter because of
the lack of water,” he said in an interview from Kolding,
Denmark, declining to provide details about his strategy.

Scandinavian temperatures dropped as much as 7 degrees
Celsius (12.6 Fahrenheit) below seasonal norms last month, the
biggest deviation in the Northern Hemisphere, according to the
Swedish Meteorological and Hydrological Institute. The weather
reduced rain and snow available for hydroelectric stations.

Electricity for delivery next quarter in Norway, Sweden,
Denmark or Finland reached 79.05 euros ($106.19) a megawatt hour
on Dec. 13 on Nasdaq OMX Group Inc.’s commodities exchange in
Oslo, the highest since August 2006. It has since dropped 14
percent to close at 67.85 euros today.

Rain, Snow

“If we have one or two more weeks of this weather, we can
go through the 100-euro mark,” said Peter Fritsche, chief
executive officer at NE Capital Management, which buys and sells
for the Aalborg, Denmark-based Neas Power Fund, speaking on Dec.
13 before prices dived.

Norway relies on hydropower, the cheapest form of
electricity, for almost all its needs, and Sweden, 50 percent.
The amount that can be generated from current rainfall and
snowmelt is about 45 terawatt hours less than normal for the
time of year, according to Jonas Almquist, managing director of
Bergen Energi AB in Stockholm, a broker for industrial clients.
The deficit exceeds all of the power that Denmark consumed in
2009, which was 34 terawatt hours.

Norwegian and Swedish hydro power supplies fell last week
faster than their average pace, according to data today on the
Nord Pool Spot AS exchange.

Idled nuclear reactors at Vattenfall AB’s Ringhals plant on
Sweden’s west coast and at E.ON AG’s Oskarshamn facility on the
east coast also cut supplies last month.

‘Very Bullish’

“What we saw early was that the hydro deficit got worse
and worse, and that made us very, very bullish,” Fritsche said.
The Neas fund is up 6.5 percent in the first 10 days of
December, according to Absolute Return Partners LLP, a London-based marketer.

Success in the Nordic power market requires “good analysis
of the market fundamentals, and traders that are adaptable” to
manage the volatility, said Tom Sargent, director of power and
emissions trading at E.ON Energy Trading SE. E.ON, Germany’s
biggest utility, also generates electricity from hydro and wind
in the Nordic region.

“More than ever, you can’t use what happened last year,”
as guidance, Sargent said in an interview yesterday in
Dusseldorf. “The situation is constantly changing.”

Hedge funds are mostly private pools of capital whose
managers participate substantially in the profit or losses from
speculation on whether the price of assets will rise or fall.

At least six speculating in European energy markets closed
in the first half of the year in part because of stable prices.
Robert Dudley, the chief executive officer of BP Plc, said in a
Nov. 2 interview that he was shrinking trading at Europe’s
second-largest oil company because a lack of volatility made
buying and selling commodities less profitable.

Early Winter

Shepherd Energy AB in Stockholm returned zero last month,
as one of three funds in the Bloomberg survey that didn’t
benefit from the rally in Nordic electricity.

“Many people didn’t count on such an early winter and
missed the strength of the rise, including us,” said Mattias
Hellberg, a fund manager at Shepherd.

The median gain for hedge funds trading European power in
November was 2.7 percent, according to the survey. That compares
with a 1.5 percent decline, the most since May, for all types of
hedge funds worldwide, according to the Bloomberg aggregate
hedge fund index, which tracks 2,627 funds. The Thomson
Reuters/Jefferies CRB Index, a basket of 19 energy, metals and
farm products, rose 0.25 percent last month.

Nasdaq OMX’s commodities market, where 55.5 billion euros
of power was bought and sold in the 11 months through November,
is also profiting from winter weather. Last month’s price jump
reversed a trend of declining volume, Geir Reigstad, head of
Nasdaq OMX Commodities, said in an interview in London.

November Reaction

Trading in September was “really, really silent, and
suddenly the reaction came in November,” he said. Volume rose
42 percent to 119.7 terawatt hours in November from October.
Business has yet to the match the 124.7 terawatt hours that
traded in November 2009, according to exchange data.

Temperatures will remain colder than average in January in
most of the Nordic region, limiting precipitation, WSI Corp.
said Nov. 22. February will probably be warmer than average,
according to the Andover, Massachusetts-based weather
forecaster, which has more than 200 energy clients.

Nordic power is trading higher than German peakload,
meaning electricity is being exported north into Scandinavia,
said Hellberg. More gains may make it profitable to switch on
oil-fired generators, the costliest form of making electricity,
he said.

RWE Strike

German peakload prices for delivery in two days rose as
much as 19 percent today, partly after workers at RWE AG, the
country’s second-biggest utility, said they will strike and
reduce power output.

“We missed the initial gain in November, but fundamentally
speaking, it was completely correct” that prices should rally,
he said by e-mail. Plenum forecast prices will remain volatile
and jump if the unusually cold weather persists.

“It’s shaping up to be an exciting season for the Nordic
power market,” said Walbech at Nordic Power Trading, who left
Dong Energy A/S, Denmark’s biggest utility, in 2007 to start his
own trading firm. “Prices will go up and down really fast.”

The following table shows confirmed or estimated returns
for European energy hedge funds, provided by data supplied to
Bloomberg from fund managers and from company websites.